Which Retirement Plan Is Right For Your Business?

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Image of man and woman reviewing retirement plans with business team working in background

Offering a retirement plan to your employees can provide them with a substantial employee benefit, and it can also be a significant tax savings tactic for your business.

Most contributions made to employee accounts are tax-deductible and any assets in the plan grow tax-free. Plus, a comprehensive retirement package is attractive to new talent – potentially attracting and retaining better employees.

But it can be tough to choose the right plan. Where do you start? Which plan is right for you, your business, and your employees?

Here’s an overview of five common retirement plans and how they compare.

 

Traditional 401(k) plans

  • Highlight of plan: Allows a higher level of salary deferrals by employee compared to other plans
  • Eligible employers: Any employer with one or more employees (including self-employed)
  • Filing requirements: Annual filing of Form 5500 and summary report to participants
  • Employer contributions: Employers can make contributions on behalf of all participants, make contributions based on employees’ elective deferrals, or both. They may contribute up to $56,000 or 100% of each employee’s compensation – whichever is less.
  • Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $19,000 in 2019.
  • Eligibility requirements: Must be offered to all employees at least 21 years old who completed at least one year of service for the employer.
  • Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.
  • Additional plans allowed: Yes
  • Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.
  • Note: ADP/ACP discrimination testing is required.

 

Safe harbor 401(k) plans

  • Highlight of plan: Doesn’t require ADP/ACP discrimination testing.
  • Eligible employers: Any employer with one or more employees (including self-employed)
  • Filing requirements: Annual filing of Form 5500 and summary report to participants
  • Employer contributions: Employers must contribute 3% of all eligible participants’ compensation or match 100% of employee deferrals up to 3% of their compensation, plus match 50% of employee deferrals up to 3-5% of their compensation. Total employer contributions may not exceed $56,000 or 100% of each employee’s compensation – whichever is less.
  • Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $19,000 in 2019.
  • Eligibility requirements: Must be offered to all employees at least 21 years old who completed at least one year of service for the employer.
  • Vesting: Employee salary deferrals and required employer contributions are immediately 100% vested. Any additional employer contributions may vest over time according to plan terms.
  • Additional plans allowed: Yes
  • Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.

 

403(b)

  • Highlight of plan: No discrimination testing on employee salary deferral contributions.
  • Eligible employers: Public schools, colleges or universities, churches, and certain tax-exempt nonprofit organizations.
  • Filing requirements: Annual filing of Form 5500 and summary report to participants
  • Employer contributions: Employers can make contributions on behalf of all participants, make contributions based on employees’ elective deferrals, or both. Employers can contribute up to $56,000 or 100% of each employee’s compensation – whichever is less.
  • Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $19,000 in 2019.
  • Eligibility requirements: Must be offered to all employees working 20 hours or more per week. Employers can require employees to satisfy certain age and service requirements in order to participate in the employer contribution portion of plan.
  • Vesting: Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.
  • Additional plans allowed: Yes – employers can offer another 401(a) or 457 qualified plan
  • Tax advantages: Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.

 

SEP IRA

  • Highlight of plan: No startup and operating costs.
  • Eligible employers: Any employer with one or more employees (including self-employed)
  • Filing requirements: None
  • Employer contributions: Employers can contribute up to 25% of each employee’s compensation or $56,000 per participant – whichever is less. Employer must contribute equally for all eligible employees.
  • Employee contributions: None – employees don’t contribute to the plan.
  • Eligibility requirements: Must be offered to all employees at least 21 years old, employed for three of the last five years and earned at least $600 for 2019.
  • Vesting: Employee is immediately and always 100% vested.
  • Additional plans allowed: Yes, but if Form 5305-SEP was used to establish a plan, you can only have another SEP
  • Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. The maximum deduction is the amount the employer contributed or 25% of its employees’ wages, whichever is less. Contributions aren’t taxed and enjoy tax deferral until distribution.

 

Simple IRA

  • Highlight of plan: Minimal administrative paperwork, low operating and startup costs compared to other plans.
  • Eligible employers: Any employer with 100 employees or less, whose employees received at least $5,000 in compensation for the preceding year. Any employers that exceed 100 employees are granted a two-year grace period.
  • Filing requirements: None
  • Employer contributions: Employer is required to contribute either a matching contribution up to 3% of compensation or 2% nonelective contribution for each eligible employee.
  • Employee contributions: Employees can elect to make pretax deferrals through payroll deductions. Employees can contribute up to $13,000 in 2019.
  • Eligibility requirements: Must be offered to all employees who have earned at least $5,000 in any prior two years, and are reasonably expected to earn at least $5,000 in the current year.
  • Vesting: Employer and employee contributions are immediately 100% vested.
  • Additional plans allowed: No
  • Tax advantages: All employer contributions are deductible on the employer’s federal income tax return. Pretax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.

 

Once you choose a plan, what’s next?

Contact a tax professional or a financial institution that’s familiar with retirement plans to discuss plan options and features in more detail.

Select the type of plan you want and decide who the administrator of the plan will be – it can be handled internally or outsourced to a third party.

Lastly, make sure your payroll processor knows the plan, its amendments and how to implement. Your company is ultimately responsible for complying with legal requirements, not your plan sponsor or administrator.

 

Have questions about retirement plans ? Let’s talk!